The courts continue to find in favour of HMRC in cases involving avoidance schemes, with the most recent example being Vaccine Research Limited Partnership and another v CRC at the Upper Tribunal.

With so many cases going against such scheme providers, questions are raised as to whether the various new powers that HMRC is seeking on avoidance and other matters are really necessary?  Perhaps using the existing HMRC powers to more effectively challenge such schemes is all that is really needed.

Vaccine Research Limited Partnership and another v CRC

The case in question concerned an R&D avoidance scheme, with a partnership being established in Jersey. The taxpayer partnership entered into an agreement whereby it paid another entity, Numology Ltd, £193m to purportedly carry out research and development (R&D).

Numology paid a very small proportion of this (£14m) to a subcontractor, PepTCell, who actually undertook the work and then contributed £86m to the taxpayer business itself.  The partners claimed for a loss of £193m in respect of R&D capital allowances.

The Upper Tribunal unheld the First-Tier Tribunal’s decision, finding that the funds were put into an artificial loop and effectively only the £14m paid to the subcontractor was genuinely incurred for R&D.  The Tribunal noted that the FTT was right to conclude “that Numology Ltd’s contribution represented funds put into a loop as part of a tax avoidance scheme, and [was] not in reality spent on research and development”.

The evidence of recent case law suggests that the existing provisions available to HMRC are sufficient to close down avoidance schemes and yet they continue to seek new powers in the name of cracking down on tax avoidance.  It is concerning that HMRC continue to amass new powers, such as attempting to take funds directly from bank accounts and issuing non-appealable tax demands, on the premise that they are needed when it appears that they are not.  Please feel free to share your own thoughts below.

Many contractors, especially in the IT industry will currently be pondering whether or not to reach agreement with HM Revenue and Customs under their Contractor Loans Settlement Opportunity.

The first question which springs to mind is why HMRC have put the pack together.  It may have been issued with the best intentions but to a lay person I am reliably informed that it appears bulky, daunting and technical.  It also repeats a number of points.

Secondly, it refers to the Boyle case and invites taxpayers to consider its conclusions.  Few, I suspect will manage the 29 pages of complex technical analysis and case law precedent referred to.  It is clear though that the taxpayer lost – convincingly!

Following on from this, if HMRC are comfortable with the decision in Boyle why are they offering a Settlement Opportunity with no penalty rather than just lining up the taxpayers like skittles, to collect tax, interest and penalties?

I imagine this may be because the legal team at HMRC have reached the sensible conclusion that ‘circumstances alter cases’.

Any aficionado of case law will appreciate that when a Tribunal says they ‘did not find Mr Boyle a straightforward witness’, his chances of winning are pretty much zero, and his version of key facts is unlikely to be accepted.  As the Tribunal did not find him credible as a witness, they were obviously minded to find against him.

On this analysis, a well advised IT Contractor may ponder whether their personal circumstances are sufficiently different to enable them to be distinguished from Boyle?  If so, is there an argument that they have no personal liability?

HMRC have set an interesting conundrum for affected taxpayers.  Perhaps they have had advisors in from Ladbrokes?!  Should affected punters stick or twist?

Bearing in mind the amounts involved in many of these cases, deciding what to do is not something to be done lightly.  It makes sense to ‘study the form’ and get professional advice.  I would also suggest it would be sensible for that advice to be independent of the advisors who set the scheme up.  This is to avoid the risk of there being a conflict of interest or people advising on schemes they are personally attached to.

What do other people think about the Contractor Loans Settlement Opportunity terms?

In the First-Tier Tribunal case of K Moorthy (TC3952) the judge noted that the taxpayer ended up in a worse position regarding his compensation for loss loss of office following the decision than if he had accepted an earlier offer made by HMRC.

ITEPA 2003, s.401 catches payments made directly or indirectly in consideration of a termination of employment. Unfortunately, in this case the tribunal found that the entire sum of £200,000 which had been paid to the taxpayer fell within the scope of s.401.

Following redundancy in March 2010, the taxpayer argued that he was discriminated against because of his age and subsequently looked to take his case to an Employment Tribunal. As a result of mediation, the Company paid the taxpayer an ex gratia sum of £200,000 as compensation for loss of office and employment. This was paid in 2010/11 under an agreement that the first £30,000 was paid free of tax and the balance subject to a 20% tax deduction. The taxpayer claimed a refund of £34,000, on his tax return, stating the tax had already been deducted and that it should be fully exempt as it was paid to settle his discrimination claim and protect the company’s reputation.

HMRC considered the full amount to be taxable but by “concession and in order to try and reach agreement” offered to treat £60,000 as tax exempt. The taxpayer appealed because he felt the the full amount should be exempt. He also revealed that the Company had previously made a statutory redundancy payment of £10,640.

The taxpayer’s appeal was unfortunately dismissed with the judge ruling that the £30,000 exemption should be reduced to take into account the statutory redundancy payment of £10,640. Further the judge ruled HMRC’s additional £30,000 allowance was an ‘unlawful concession’ that the Tribunal could not take into account.

Clearly, the facts in each compensation for loss of office/employment case are different. As ever obtaining professional advice is sensible. It is possible that suitable advisors could have informed Mr Moorthy that the deal offered by HMRC was a good one and therefore saved him a substantial amount of tax.